Taxation of online sales

ALERT: Supreme Court overturns Quill, opens door to taxation of online sales

June 29, 2018

If you are a remote seller, make sales online or make sales into multiple states, you may be impacted by a recent ruling by the U.S. Supreme Court.

If you are a remote seller, make sales online or make sales into multiple states, you may be impacted by a recent ruling by the U.S. Supreme Court.

On June 21, 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that a state can impose sales tax collection obligations on a seller without any physical presence in the taxing state. In its ruling, the Court overturned a 1992 Court decision – Quill Corp. v. North Dakota – holding that states could not impose a sales tax on sellers that did not have any physical presence in the taxing state.

The impact

The Wayfair decision clears the way for states to impose sales tax collection obligations on remote sellers, those that make sales online or those that make sales into multiple states. This would require such businesses to collect and remit sales tax if it satisfies the states’ various sales thresholds.

Businesses with any form of online or virtual presence should be aware that state and local governments are likely to enforce existing economic nexus legislation. As of today’s date, 15 states have enacted some form of sales tax laws similar to South Dakota’s. It is likely that states without existing economic nexus legislation will move quickly to enact such legislation with the South Dakota statute as the model.

The history

In response to the rise in online sales and the corresponding effect on sales tax collections, South Dakota enacted an economic nexus law in 2016 requiring out-of-state retailers that made at least 200 sales transactions or had sales totaling at least $100,000 in the state to collect and remit a 4.5 percent sales tax.

Ultimately, the Supreme Court concluded that the South Dakota tax satisfies the substantial nexus requirement. The Court also acknowledged that several provisions of South Dakota's tax system prevent discrimination against or undue burdens on interstate commerce and, therefore, support the constitutional framework: This includes:

  1. a safe harbor for sellers who transact only limited business in South Dakota;
  2. no retroactive obligation to remit sales tax; and
  3. a system that standardizes taxes to reduce administrative and compliance costs for sellers.

Next steps

This is a momentous ruling that could have a significant impact on businesses of all sizes. Companies need to begin outlining the impacts for those already in place and be aware of additional changes likely to come. This could mean revising business models, IT systems and internal processes for calculating tax obligations.

Your AGH tax advisor and Jerry Capps are available to discuss how this ruling could impact your business. Jerry can be reached using the information below. We will continue to provide updates as new information becomes available.

Gerald Capps, JD

Senior Vice President
State & Local Tax Services

Jerry Capps and his State and Local Tax (SALT) team provide sophisticated state and local tax planning, strategic advice and advocacy to numerous mid-market, Fortune 100 and industry-leading companies. The team has returned many millions of dollars in one-time and recurring tax savings to companies.

In addition to planning and compliance, the SALT practice includes legislation and policy, litigation, and controversy matters involving income, franchise, sales and use and property taxes. His work involves critical questions on nexus, apportionment, the Multistate Tax Compact, and the equal protection, due process, and commerce clauses of the United States Constitution. Capps is also a respected advocate on issues of tax policy. He represents clients in all phases of state and local tax controversy, including audit assistance and administrative hearings, and he provides counsel on state and local income and transactional costs for mergers, acquisitions and corporate reorganizations. He has been engaged as a keynote speaker for organizations including the Institute for Professionals in Taxation, state and local CPA societies, university and professional accounting conferences, and chambers of commerce.

Capps is a member of the Institute for Professionals in Taxation, the Kansas Society of Certified Public Accountants, the American Bar Association, and the Kansas Bar Association.

NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.

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